Nokia Expectations Are On The Generous Side

With Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V)’s Microsoft sale poised to go through in just a few months, Deutsche Bank Markets Research analysts Kai Korschelt and Johannes Schallerare are looking ahead to the company’s future. Here, they predict that the current expectations set on Nokia will prove to be too optimistic.

Nokia’s IP division seem ambitious

Following H213’s strong re-rating to a sizable valuation premium to peers, we believe expectations for patent/IP monetization and cash returns have increased. While we have raised NSN & AT estimates, our analysis suggests that ‘bull case’ expectations on Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V)’s IP division seem ambitious. We further believe management may prioritize a return to Investment Grade over fast distributions of excess cash and model a reintroduction of a E0.2/share DPS. We have raised our target to E5.25 and maintain Hold.

Tweaking up NSN revenues, IP bull case could prove too optimistic

We have raised estimates reflecting increased NSN revenues (Europe & China) as well as a detailed remodeling and analysis of Nokia’s wireless IP/Advanced Technologies division. While Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) has a very strong patent portfolio, our analysis suggests that some investors’ very bullish monetization/growth expectations (>E1bn revenues by 2016) appear too optimistic. Once we reflect likely ‘fixed’ royalties from Apple Inc. (NASDAQ:AAPL) & Microsoft Corporation (NASDAQ:MSFT) in 2014, revenue growth for Nokia’s Advanced Technologies from DBe’s 2014 revenue base of E630m may be a somewhat modest 4-7% p.a. going forward. Two separate bull case scenarios for the division suggest upside to ~E900m in 2016 revenues, which could drive our EPS from E0.28 to ~E0.32, putting the stock on 19x P/E.

Strategic review coming up: Sizeable cash returns may need to wait

We expect Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) to host a strategic review event after the Microsoft deal closes, likely in February or March. We believe the company will focus on two aspects: 1) The scope of the portfolio, where we expect management to retain its current ‘pro forma’ businesses NSN, Advanced Technologies/patents and HERE/maps going forward. 2) Balance sheet policy/cash returns. Following the sale of D&S we estimate ~E6.4bn/E1.6/share net cash and assume the company wants to keep at least E2bn on hand and E2-3bn for potential M&A, implying E1-2bn in ‘excess’ cash. We believe excess cash will be slowly distributed with a reinstated dividend of E0.2/~3.5% yield in our view the most likely first step. Given Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V)’s desire to return to an Investment Grade rating, we believe further cash returns may need to wait until 2015.

Target price raised to E5.25, risks

We have raised our target from E4.75 to E5.25. Our target is based on a blend of two valuation approaches: 1) A SOTP of E5.2/share and 2) a E5.3/share P/E based valuation that applies 13x 2015 P/E to estimated ‘stub’ EPS and adds back net cash pro forma (E1.6/share). Key up/downside risks: Stronger/weaker Carrier Capex and/or mix; pace of IP monetization, the sale of D&S not materializing.